Changing role of RBI in the financial Sector
- The Reserve Bank of India (RBI) is India’s central bank. The RBI is responsible for a variety of activities, including monetary policy and currency issuance. India has achieved some of the world’s highest GDP growth rates. It is also regarded as one of the four most strong developing market countries, including the BRIC nations, which comprise Brazil, Russia, India, and China.
- Prior to deregulation, the RBI regulated and controlled the financial industry, which included commercial banks, investment banks, stock exchange activities, and the foreign exchange market. With economic liberalization and financial sector changes, the RBI needs to adapt its function from controller to facilitator of the financial system. This suggests that financial institutions were allowed to make choices on various issues without contacting the RBI. This opened up the financial sectors to private companies. The primary goal of the financial reforms was to stimulate private sector involvement, improve competition, and enable market forces to function in the financial sector. Thus, before to liberalization, the RBI controlled financial sector operations, but after liberalization, financial sector activities were mostly determined by market forces.
- Several publications by the International Monetary Fund (IMF) and the World Bank have emphasized India’s rapid development. In April 2019, the World Bank forecast that India’s GDP will rise by 7.5% in 2020.1 In April 2019, the IMF projected a 7.3% GDP growth rate for 2019 and 7.5% in 2020.2 Both predictions show India as having the world’s greatest predicted GDP growth over the next two years.
- As in other economies, the central bank is responsible for regulating and monitoring monetary policies that influence commercial and personal finance, as well as the banking sector. As GDP rises in the international rankings, the RBI’s activities will become more significant.
- In April 2019, the RBI announced a monetary policy decision to cut the borrowing rate to 6%.3 The second rate decrease of 2019 is likely to have a greater effect on borrowing rates throughout the credit market.4 Prior to April, loan rates in the nation were quite high, notwithstanding the central bank’s stance, which has limited borrowing across the economy.
- The central bank must also deal with a somewhat fluctuating inflation rate, anticipated at 2.4% in 2019, 2.9% to 3% in the first half of 2020, and 3.5% to 3.8% in the second half of 2020.
- The RBI may also make judgments on the country’s currency. In 2016, it implemented currency demonetization, removing Rs. 500 and Rs. 1000 notes from circulation, primarily to combat criminal activity. The post-analysis of this choice reveals some successes and losses. The demonetization of the designated currencies generated cash shortages and confusion, necessitating further expenditure from the RBI to issue new money.
- Quantitative measurements:
- It refers to the RBI’s measures that impact the total money supply in the economy. Various tools of quantitative measurements include:
- The bank rate is the interest rate at which the RBI grants long-term loans to commercial banks. The current bank rate is 6.5%. This tool is used to manage the money supply in long-term lending. When the RBI raises the bank rate, commercial banks raise their interest rates as well. As a result, the economy’s need for loans declines. The opposite occurs when the RBI lowers the bank rate.
- The liquidity adjustment facility enables banks to correct their daily liquidity imbalances. It supports Repo and Reverse Repo operations.
- Repo rate: The Repo repurchase agreement rate is the interest rate at which the Reserve Bank lends short-term funds to commercial banks against securities. Currently, the repo rate is 6.25%.
- Reverse repo rate: This is the inverse of Repo, in which banks lend money to the RBI by buying government assets and earning interest on the proceeds. Presently, the reverse repo rate is 6%.
- Marginal Standing Facility (MSF): Introduced in 2011-12, it allows commercial banks to borrow money from the RBI by pledging government assets that are within the restrictions of the statutory liquidity ratio (SLR). Presently, the Marginal Standing Facility rate is 6.5%.
- Market stabilisation scheme (MSS): This mechanism is used to absorb excess liquidity from the economy by selling short-term government securities. The funds received via this instrument are maintained in a separate account at the Reserve Bank. It was debuted in 2004. Following demonetization in 2016, the RBI upped the cap for the market stabilization plan.
- Every Central Bank is responsible for a variety of promotional and development duties, which differ by nation. This is especially true in emerging countries like India, where the RBI has been tasked with promoting the financial system as well as executing a variety of unique and nonmonetary responsibilities.
- Banking habit promotion and system growth: It serves multiple objectives, including encouraging banking habits among various segments of society and promoting the geographical and functional extension of the banking system. For this goal, the RBI established various institutions, including the Deposit and Insurance Corporation in 1962, the Agricultural Refinance Corporation in 1963, the IDBI in 1964, the UTI in 1964, the Investment Corporation of India in 1972, the NABARD in 1982, and the National Housing Bank in 1988, among others.
- Export promotion via refinancing facility: The RBI encourages exports via the Export Credit and Guarantee Corporation (ECGC) and EXIM Banks. It offers a refinancing option for export credit granted by scheduled commercial banks. The interest rate charged for this reason is rather modest. ECGC insures export receivables, whilst EXIM banks offer long-term financing to project exporters, etc.
- establishment of financial system: The RBI supports and stimulates the establishment of financial institutions, financial markets, and financial instruments that are required for the country’s rapid economic development. It encourages all banking and non-banking financial entities to ensure a stable financial system.
- Support for Industrial Finance: The RBI is committed to industrial growth and has launched many measures to promote it. It has played a significant role in the formation of industrial financing institutions such as ICICI Limited, IDBI, and SIDBI. It benefits small-scale enterprises by increasing loan availability. The Reserve Bank of India has instructed commercial banks to give enough financial and technical support via specialist Small-Scale Industries (SSI) offices.
- The RBI supports the cooperative sector by providing indirect funding to state cooperative banks. It primarily sends this funding via the NABARD.
- Support for agriculture: The RBI offers financial assistance to the agricultural industry via NABARD and regional rural banks. NABARD offers short- and long-term financial facilities to the agricultural industry. The RBI provides NABARD with indirect financial support by lending significant sums of money at cheaper interest rates via the General Line of Credit.
- Banking staff training is provided by the RBI via the establishment of banker’s training colleges in various locations. Banking workers get training from institutes such as the National Institute of Bank Management (NIBM), Bank workers College (BSC), and others.
- Data collection and report publication: The RBI gathers data on interest rates, inflation, deflation, savings, and investment, which is particularly useful for scholars and policymakers. Its Publication section distributes statistics on several economic areas. It provides weekly reports, yearly reports, reports on the trends and development of commercial banks, and so on.